The World Bank (International Bank for Reconstruction and Development, IBRD rated Aaa/AAA) is taking a step into the brave new world of digital finance to sell the first-ever bond to be issued entirely using blockchain technology, the bank announced on Friday.
The World Bank said it has mandated the Commonwealth Bank of Australia (CBA) as the sole arranger of the first bond globally to be created, allocated, transferred and managed through its life cycle using distributed ledger technology.
Indicative investor interest in bond-i (blockchain operated new debt instrument) has been strong. The World Bank and CBA expect to launch the transaction following a period of consultation with a broader set of investors.
Blockchain has the potential to streamline processes among numerous debt capital market intermediaries and agents. This can help simplify raising capital and trading securities; improve operational efficiencies; and enhance regulatory oversight.
The World Bank issues between US$50-US$60 billion annually in bonds for sustainable development. It has a 70-year track record of innovation in the capital markets. Among its pioneering issuances are the first bond in global format—a globally traded and settled bond issued in September 1989; and the first e-bond, a fully integrated electronic bond issued in January 2000. As a frequent issuer in the Australian dollar market, it has since 1986 raised nearly A$60 billion from investors globally.
Arunma Oteh, World Bank Treasurer, said: “Since our first bond transaction in 1947, innovation and investor satisfaction have been important hallmarks of our success with leveraging capital markets for development. Today, we believe that emerging technologies, equally offer transformative, yet prudent possibilities for us to continue to innovate, respond to investor needs and strengthen markets. We are therefore delighted that after working with our information technology colleagues and the Commonwealth Bank of Australia over several months, that we are now in a position to launch our first blockchain bond transaction. CBA’s commitment and Microsoft’s wealth of experience have been instrumental to achieving this historic milestone.
Our sincere appreciation to our pioneer blockchain bond investors, who are partnering with us on this transaction because of our common desire to champion greater efficiency, and transparency as well as more robust issuance processes.
Our goal is to continue to harness innovation for the benefit of markets and our mission of ending poverty and boosting shared prosperity.”
Denis Robitaille, World Bank Group Chief Information Officer, said: “Helping countries transition to technology-led development is key to our goals of reducing poverty and promoting lasting development. This is at the heart of the World Bank’s Innovation Lab—and this pioneering bond is a milestone in our efforts to learn how we can advise our client countries on the opportunities and risk that disruptive technologies offer as we strive to achieve the Sustainable Development Goals.”
James Wall, Executive General Manager of International, CBA said: “We take a collaborative approach to innovating and have a track record of partnering with other leading financial institutions, government bodies and corporates to innovate through blockchain. We believe that this transaction will be ground breaking as a demonstration of how blockchain technology can act as a facilitating platform for different participants. We are delighted to have partnered with the World Bank and fully support its vision of making innovative use of technology such as blockchain to increase the efficiency of financing solutions to better achieve their goal to end extreme poverty.”
The bond-i blockchain platform was built and developed by the CBA Blockchain Centre of Excellence. Since 2009, CBA has acted as lead manager for a number of IBRD bond issuances in the Australian and New Zealand capital markets. CBA’s dedicated blockchain team has taken a lead role in applying blockchain technology to capital markets.
Sophie Gilder, Head of Blockchain, Innovation Labs, CBA said: “We know blockchain has the potential to revolutionize financial services and markets, and this transaction is a significant step towards that future state. By working collaboratively with the World Bank, we were able to find solutions to technical and legal considerations to make this ground-breaking transaction a reality. This project further solidifies CBA’s position at the forefront of blockchain technology and we are excited to build on this, in partnership with our clients.”
The development of this offering has been conducted with the support and input of the investor community including Northern Trust, QBE and Treasury Corporation of Victoria.
World Bank infrastructure for the bond will run in Washington, D.C. on the Microsoft Azure cloud computing platform. Microsoft validated the system’s operational capabilities, security and scale.
Matt Kerner, general manager, Azure Blockchain Engineering at Microsoft, said: “Microsoft’s mission to empower every person and organization on the planet aligns well with the noble work of World Bank.”
The law firm of King & Wood Mallesons acted as deal counsel on the bond issue and advised on the legal architecture for its implementation.
About the World Bank
The World Bank (International Bank for Reconstruction and Development, IBRD), rated Aaa/AAA (Moody’s/S&P), is an international organization. Created in 1944, it is the original member of the World Bank Group and operates as a global development cooperative owned by 189 nations.
The World Bank provides loans, guarantees, risk management products, and advisory services to middle-income and other creditworthy countries to support the Sustainable Development Goals and to end extreme poverty and promote shared prosperity. It also provides leadership to coordinate regional and global responses to development challenges.
The World Bank has been issuing sustainable development bonds in the international capital markets for over 70 years to fund programs and activities that achieve a positive impact. More information on World Bank bonds is available at http://treasury.worldbank.org.
About Commonwealth Bank of Australia (CBA)
Since our beginnings in 1911 as a bank for Australian families, Commonwealth Bank of Australia Group has been providing financial services for people, businesses and communities across the country.
Today, we have grown to become one of the world’s leading financial institutions. We employ more than 51,000 people around the world. We have more than 800,000 direct shareholders with many more who own shares through their superannuation or retirement plans.
From technology firsts, innovative products and services, to an unwavering focus on customer service, the way we do business makes it easier for our customers and communities around the world to improve their financial wellbeing.
The first major application of blockchain technology was bitcoin which was released in 2009. Bitcoin is a cryptocurrency and the blockchain is the technology that underpins it. A cryptocurrency refers to a digital coin that runs on a blockchain.
Understanding how the blockchain works with bitcoin will allow us to see how the technology can be transferred to many other real-world use cases.
Bitcoin is the brainchild of a mysterious person or group of people known as Satoshi Nakamoto. Nobody knows the identity of Nakamoto, but their vision was laid out in a 2009 whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System.
The blockchain behind bitcoin is a public ledger of every transaction that has taken place. It cannot be tampered with or changed retrospectively. Advocates of the technology say this makes bitcoin transactions secure and safer than current systems.
The bitcoin blockchain is “decentralized,” meaning it is not controlled by one central authority.
While traditional currencies are issued by central banks, bitcoin has no central authority. Instead, the bitcoin blockchain is maintained by a network of people known as miners.
These “miners,” sometimes called “nodes” on the network, are people running purpose-built computers that are actually competing to solve complex mathematical problems in order to make a transaction go through.
One of the advantages of blockchain is that it can’t be tampered with. Each block that is added onto the chain carries a hard, cryptographic reference to the previous block.
That reference is part of the mathematical problem that needs to be solved in order to bring the following block into the network and the chain. Part of solving the puzzle involves working out random number called the “nonce.” The nonce, combined with the other data such as the transaction size, creates a digital fingerprint called a hash. This is encrypted, thus making it secure.
Each hash is unique and must meet certain cryptographic conditions. Once this happens a block is completed and added to the chain. In order to tamper with this, each earlier block, of which there are over half a million, would require the cryptographic puzzles to be re-mined, which is impossible.
It may seem like an unnecessarily complicated process for moving money. But the blockchain has its advantages.
With traditional methods of payment every transaction in the world is registered on privately-held databases owned by corporate and state entities. These databases are not accessible by the public and are therefore closed. They are also usually owned by one entity. Because of this nature, they could be open to fraud or to being hit by an attack that could cripple a network, unlike bitcoin’s blockchain. Now think about the blockchain as a beefed up database. It records all transactions in bitcoin, doesn’t allow repeat payments, and requires several parties to authenticate the movement of the digital coin.
Because the blockchain is not centralized, it also means that if one part of it went down, the whole network would not collapse. There are many different parts of the bitcoin network that require it to work. So even if one miner went out of action for example, transactions would still work.
Banking on the blockchain
The promises of blockchain technology have been praised by the banking industry in particular. They see it as a way to reduce costs, make processes more efficient and potentially underpin a lot of their operations.
Banks often call blockchain “distributed ledger technology” or DLT to distinguish it from bitcoin’s blockchain. Many major banks have begun carrying out blockchain experiments.
Any entity hoping to make processes cheaper, faster and more traceable is trailing blockchain. Let’s take a look at a handful of examples across different industries, not just the banks.
Last year, stock exchange group Nasdaq partnered with Swedish bank SEB to trial a blockchain-based mutual fund trading platform for example. Nasdaq also trialed blockchain to allow shareholders of listed Estonian firms, who weren’t physically present for meetings, to vote.
Blockchain technology can also be used to track products across a supply chain or route. For example, diamond producer De Beers recently announced that it had trialed the technology to trace the stones from the time they were mined to delivering them to a jeweler. The blockchain can also be used to track ownership of assets such as fine art of even property.
Elections are another space which blockchain technology could be applied to. In West Virginia’s primary election in May, some voters were able to vote via a mobile blockchain-based platform.
Despite the hype and promise of blockchain or DLT, it’s not something that will be widespread in the next few months.
The current state of play sees banks experimenting with the technology, but not adopting it on a wide scale. It’s being used for singular processes, such as loans in the case of BBVA or cross-border currency movement like Santander is testing. But there are a number of other use cases and even industries that blockchain can touch. Insurance, health care and government agencies just to name a few.
Still, there are a number of stumbling blocks that the technology needs to overcome to be viable across major organizations and industries at large.
One of the major ones is interoperability. Essentially, how will blockchains developed by one firm work with DLT run by another company? There’s a number of companies as outlined before developing blockchain platforms. But there’s no guarantee that each one will be compatible with another.
It can be likened to the early days of mobile operating systems, where there were several systems including iOS, BlackBerryOS, Android and Symbian. Now iOS and Android dominate the smartphone market.
Another big factor is whether these blockchain systems can scale and be able to handle the large transaction processes needed across industries.
Also, while many of the blockchains in existence are public, major companies are trialing a private version of the technology. But in the case of BBVA, they used both a public and private version of blockchain.
Some of the blockchains, in particular Ethereum, rely a lot on the ether digital token to help power it. But so far, banks have been reluctant to touch anything that looks or feels like cryptocurrency.
There are still negative connotations with cryptocurrencies including wild price swings and the link between bitcoin and people buying illegal items from the dark web. Pertusa at BBVA says that while tokens might be useful for some applications there are ways to use public blockchains without them.
While blockchain technology is being experimented with across a number of industries, the future is still uncertain and the power and limitations of this technology is still unclear.
Whether blockchain begins to power the world and is the biggest disruptive force since the internet, as some have suggested, remains to be seen.